Macquarie Agri-view --Implications of lower Brazilian sugar

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Macquarie Agri-view
Implications of lower Brazilian sugar
Feature article
 This week, UNICA released its much awaited revised estimates for the
2011/12 Brazilian sugar cane crop. It is now clear that the world’s largest
sugar producer will see production fall for the first time in a decade. While the
global 2011/12 surplus we had expected will likely shrink as a result, it will still
be large, at over 5m tonnes, thanks to production growth elsewhere. We are
more concerned, however, on reduced export availability in the interim period.
Although we still expected price to trend lower as we enter 2011/12, tighter
trade flows have the potential to support prices higher at specific times
compared to that indicated by the total season’s market balance.
Latest market update
 Cocoa futures rallied this week to $3,180/t on the back of a bullish crop report
from an independent analyst regarding next year’s supply, before giving way
to macro concerns. Support also came from news that Europe’s 2Q 2011
cocoa grind rose 8.3% year-on-year to 355,593t. The rise was slightly above
expectations, but not entirely surprising, given that grinding activity had shifted
to Europe in March-May due to the temporary closure of capacity in Ivory
Coast during the embargo and civil unrest. The Ivorian processors are back
up and running now, so growth in EU grindings may ease in 3Q. However,
cocoa powder demand, particularly in Asia, is expected to continue to drive up
grindings over 2H 2011. For 2010/11 as a whole, Macquarie sees global
grindings up 2.9%. We continue to believe that the current 2010/11’s larger
than expected surplus (including stocks that have yet to leave Ivorian ports)
will need to be worked off before the market can start pricing in the expected
supply reductions in 2011/12.
 Cotton July futures sold off heavily following this week’s USDA report to
104c/lb, before firming up again on new business (as buyers took advantage
of the 9-month low). Overall, the report was bearish for cotton, as both the US
and global ending stocks were raised for 2011/12 following continued
reductions in demand. For the US, a much higher abandonment rate was
factored, which took production of new crop down to 16m bales (down 1m
from last month and 2.1m from last season), despite higher planted acreage.
However, this bullish production outlook was offset by a 1m reduction in
export demand. Global demand was lowered to 116.75 (down 2.2m from last
month), implying global cotton stocks were up 2.75m bales from last month –
taking stock/use ratio to a higher 43.7%.
 Coffee futures continued to be influenced by macro events, in the absence of
fresh fundamental news – trading within the now familiar 257–267c/lb band.
Initially falling in line with news on EU’s debt crisis possibly spreading to Italy,
coffee rose after Bernanke raised the possibility of a further stimulus to
stabilize the US economy. Selling pressure from origin remains weak, despite
Brazilian harvest half way through, but roasters are equally inactive at this
seasonally quiet time. According to the ICO, world coffee production in the
current 2010/11 season reached 133.3m bags, a rise of 8.2% from the
previous crop year. Estimates on 2011/12 (which would reflect Brazil’s current
off year crop) were still not available.